Michael Stumo

COMMENTARY: Strong dollar policy is costing US in global trade

Despite a lot of handwringing from globalists, President Trump’s tariffs are working. One year after the first tariffs were imposed, U.S. manufacturing employment is up by 261,000 jobs. The U.S. is outperforming all other major economies. And new investments have been announced in key sectors covered by the tariffs, including steelmaking and solar panels. There’s a clear justification for the tariffs. Countries like China have spent the past two decades flouting the rules of global trade in an effort to erode America’s economic, military and geopolitical strength. And Beijing’s use of massive subsidies, dumping, and cyber hacking has cost the United States millions of manufacturing jobs and more than 60,000 factories. Finally, the United States is rethinking its support for unrestricted free trade. But it’s also time to rethink a “strong dollar” policy that has contributed to 40 years of U.S. trade deficits — all because it makes America’s goods, services, and labor too expensive in global markets. How overvalued is this strong dollar? In 2017, former World Bank economist John Hansen estimated the dollar was 25 percent overvalued. And in the second half of 2018, Federal Reserve data showed the dollar jumping an additional 7.15 percent. That keeps driving up America’s trade deficits. Despite President Trump’s aggressive trade intervention, the 2018 U.S. trade deficit with China is still projected to climb 11 percent above 2017’s record $375 billion. And the International Monetary Fund is warning that America’s trade deficits will get even worse. The Coalition for a Prosperous America recently studied the effects of the dollar’s overvaluation on the U.S. economy. According to CPA’s research, if the dollar’s exchange value was gradually lowered by 27 percent over a six-year period, the United States could create as many as 6.7 million new jobs, including 1.4 million in manufacturing alone. And the U.S. economy would grow by an extra 4.8 percent, meaning our economy would be nearly $1 trillion larger than currently projected by 2024. Manufacturing exports would grow by 12 percent per year. And the availability of good full-time jobs for non-college educated workers would surge. The Trump administration should pay particular attention. If the dollar keeps rising, it could simply negate much of the gains the president is now achieving from his tariff strategy. The IMF certainly sees it that way. In a report last year, it said that America’s “persistent excess imbalances may become unsustainable, putting the global economy at risk and aggravating trade tensions.” While Wall Street champions an overvalued dollar, Main Street suffers weaker exports, fewer jobs, and lower incomes. There’s a clear precedent for action, though. In 1985, the Reagan administration negotiated the Plaza Accord with Japan, West Germany, France, and the United Kingdom. The agreement lowered the dollar’s exchange value, causing America’s annual trade deficits to disappear within a few years. At present, the United States keeps absorbing other countries’ overproduction, and at a cost of hundreds of billions of dollars annually. This is unsustainable, and it’s time to get the nation’s economic house in order. Adjusting the dollar is an essential remedy that would create millions of new jobs along with almost a trillion dollars in added economic growth. Washington needs to take action before the dollar causes America to lose its position as a global economic leader. Michael Stumo is CEO of the Coalition for a Prosperous America.

GUEST COMMENTARY: Corporate tax reform should benefit domestic companies

As tax reform becomes a major focus in Washington, Congress faces a unique opportunity to fix a situation that has long favored multinational corporations at the expense of U.S. companies. Doing so could level the playing field for American companies while also delivering an extra $1 trillion in tax revenue over the next decade. Currently, domestic American corporations are required to pay U.S. taxes on all of their worldwide income. In a rather unfair contrast, however, multinational firms are only required to pay taxes on foreign income after their profits are brought into the United States. Unfortunately, taxation on “foreign” profits can be avoided for decades because large companies can still use the money without appearing to return it to the U.S. It works like this: A factory in Germany makes shoes. En route to the United States, the shoes pass through a financing subsidiary in the Cayman Islands. And then the shoes are insured via another branch of the company in the Isle of Man. Then another subsidiary in Bermuda arranges for shipment with a transportation company. And finally, the shoes are shipped for sale in the U.S. Each of these steps allows the parent company to strip away the appearance of profit in the U.S. by allocating earnings to subsidiaries in low-tax countries. As Washington ponders tax reform, it’s time to focus on taxing the profits that corporations earn from the actual sale of their product inside America’s borders. This is the way that most U.S. states now assess taxes on corporate profits. And it’s a sensible system, because it would eliminate the ability of companies to hide taxable income via intermediaries in low-tax countries. The idea of taxing U.S.-based sales, an approach often referred to as “Sales Factor Apportionment”, or SFA, has been gaining traction of late. It calculates a tax obligation based on the percent of a company’s sales destined for customers in the United States. For example, a corporation sells 60 percent of its product to U.S. customers. If the company’s worldwide profit at year’s end comes to $1 billion, then $600 million (60 percent) would be taxed as U.S. income. This “sales destination” approach would allow for a vast simplification of America’s corporate tax system, because taxable income would be determined solely by final sale in the U.S. None of the intermediate steps would be allowed to complicate or detract from the tax owed. Multinational firms would be taxed the same as domestic U.S. companies because they could no longer hide their profits in tax haven countries. The various subsidiaries, branches, and partners used to obscure tax liability would all be considered part of the same overarching entity. SFA could also improve America’s trade competitiveness, because domestic producers would only pay taxes on domestic sales, not exports. Conversely, foreign producers who sell goods and services in the U.S. would be required to pay taxes on their U.S. sales as the price of accessing America’s lucrative consumer market. It’s estimated that in 2016 alone, profit-shifting through tax havens reduced U.S. corporate tax revenues by 34 percent. A destination-based tax would halt this hemorrhaging of much-needed revenues while allowing a reduction of the overall corporate tax rate It’s time to end discrimination against domestic U.S. companies that play by the rules and don’t hide profits in tax havens. Taxing all companies based upon the profits from sales to U.S. consumers levels the playing field. Small and large corporations would all pay equally for the privilege of profiting from access to the U.S. market. Michael Stumo is CEO of the Coalition for a Prosperous America, a bipartisan, non-profit organization representing the interests of 4.1 million households through its agricultural, manufacturing and labor members.
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